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Samsung Looks Beyond Smartphones to AI

March 25, 2016
Samsung wants to morph into more of a software-driven company, and is spending more to develop its own services: “We are actively looking for M&A targets of all sorts in the software area. We are open to all possibilities, including artificial intelligence.”

Samsung Electronics Co. is “actively looking” to acquire developers of artificial intelligence and other software as the world’s biggest smartphone maker tries to overcome flat-lining sales for its devices.

Samsung, which has $61 billion in cash and equivalents, wants to morph into more of a software-driven company, executive vice president Rhee In Jong said in an interview. The South Korean consumer-electronics giant also is spending more to develop its own services because the global market for gadgets is saturated and can’t be counted on for significant revenue growth, he said.

“We are actively looking for M&A targets of all sorts in the software area,” said Rhee, who runs the mobile division’s software research-and-development business. “We are open to all possibilities, including artificial intelligence. Intelligence is no longer an option – it is a must.”

Shipments of Samsung’s Galaxy smartphones and other models fell for a second straight year in 2015 as new iPhones gained traction in the high-end category and models from Huawei Technologies Co. and Xiaomi Corp. swayed budget buyers. Revenue and net income have fallen two straight years, and shares are down 16% since the end of 2012.

The company faces another difficult year because oversupply is forcing down prices for smartphones, TVs and memory chips, CEO Kwon Oh-Hyun said in a letter to shareholders before the March 11 annual meeting. Samsung is the largest maker of each.

Two new Galaxy S7 models went on sale this month. They look almost identical to the preceding S6 lineup, with the main differences being an added memory-card slot and a longer-lasting battery.

“With all that cash on hand, it’s the right thing for Samsung to spend more on software development that could also drive sales of its hardware products,” said Yoo Eui Hyung, an analyst at Dongbu Securities Co. in Seoul. “Its key hardware, such as chips and phones, can be overtaken by Chinese brands.”

Asia’s biggest technology company completed just eight deals last year, according to data compiled by Bloomberg. They included the purchase of LoopPay Inc., a company that develops technology for mobile payments. Samsung didn’t disclose the terms.

The inclusion of AI on smartphones can help ensure brand loyalty because of the amount of time it takes to “train” the software to understand your preferences, Rhee said. To that end, Asia’s largest technology company made a strategic investment of less than $20 million in the AI startup Vicarious.

Other parts of the Samsung Group conglomerate also targeted AI developers. Samsung Venture Investment Corp., a venture-capital firm partly owned by group affiliates, took part in a $25.3 million funding round for household robotics startup Jibo Inc. last year.

“Artificial intelligence will make things we do on smartphones much more convenient,” Rhee said. “Your well-trained phone will bring about a huge customer loyalty.”

Samsung’s rivals also are speeding up their efforts. AlphaGo, an AI system developed by Google DeepMind, beat a top-ranked South Korean player of the board game Go in a five-match tournament this month. Apple Inc. last year acquired the startup Perceptio, which is developing technology to let companies run advanced AI on smartphones while limiting the amount of user data shared. Baidu Inc., owner of China’s biggest search engine, is exploring deep learning and autonomous driving with scientists in Beijing and Silicon Valley.

Samsung used to consider software secondary to its hardware, but that’s changing now, Rhee said. It wants to reverse that relationship and have new software drive the development of hardware with enough computing power. If Samsung were to conjoin its own software with its own hardware, it could capture more revenue from users, he said.

To exemplify that shift, the new president of the mobile-phone division is Koh Dong Jin, who helped develop Samsung’s mobile-payment and software-security platforms. Vice chairman Lee Jae Yong also approved an in-house incubator for engineers and the spending of billions of dollars on an ecosystem connecting home appliances and cars to the Internet.

The company also pledged Thursday to change its corporate culture by streamlining internal bureaucracy, eliminating inefficient meetings and reducing excessive working hours. Samsung’s ambitions to promote its own operating system, named Tizen, and reduce dependence on Google Inc.’s Android software haven’t taken off. Yet Rhee said the mobile-wallet system Samsung Pay is expanding “unexpectedly” fast against competitors Apple Pay and Alipay, which is owned by Alibaba Group Holding Ltd.’s finance affiliate.

“We will let software drive and lead our businesses rather than assisting the hardware,” Rhee said. “We aren’t just looking at a particular technology or area. But artificial intelligence is clearly a path to take.”

By Jungah Lee

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